Combined sanctions by the US, Europe, Japan and the OECD bloc pit a $35
trillion colossus against a $2 trillion midget

The economic showdown unfolding between Russia and the West is almost entirely one-sided.

The US has the power to bring Russia to its knees through hegemonic control over the world’s banking system, using an array of lethal financial weapons developed by a cell at the US Treasury, and already deployed against Iran and North Korea.

Richard Christopher Granville, from Trusted Sources, said the US “crossed the Rubicon” last week even before the apparent missile strike against Malaysia Airlines flight 17, imposing sanctions that effectively shut the energy trio of Rosneft, Novatek, and Gazprombank out of international finance.

“The Americans have the power to throttle Russia unilaterally because no European or Western bank of any importance is going to defy the US after the fines imposed on BNP Paribas,” he said.

“What has been holding them back is fear of a damaging split between the US and Europe, since it is Europe that suffers the full blow-back from sanctions. This issue has been blown away completely by the crash. Europe’s leaders now have a duty to their own citizens to be tough,” he said.

Mr Granville said the yawing gap that was building up last week between the two sides of the Atlantic has suddenly closed, making it much harder for Russian president Vladimir Putin to keep playing Europe off against America. Europe’s anger over the apparent missile strike and the abuse of the crime scene has denied him his last trump card.

Former Russian premier Mikhail Kasyanov told Bloomberg that any further escalation of sanctions to “tier 3” action against the whole financial sector will cause the economy to “collapse in six months”.

Russia can inflict some damage by retaliation, but the effect is asymmetric and widely spread. Russia’s economy is the same size as California’s. Combined sanctions by the US, Europe, Japan and the OECD bloc pit a $35 trillion colossus against a $2 trillion midget.

The Kremlin can in theory use gas as a diplomatic weapon but this would ravage Russia’s own economy. It would not achieve much at this time of the year in any case since Europe has built up large gas reserves.

The EU has huge spare capacity for imports of liquefied natural gas (LNG), and there is no longer an acute shortage of global LNG supplies. Several pipelines have been modified since 2009 so that gas can be funnelled both ways, reaching most EU areas. Both Poland and Lithuania will be opening new LNG terminals this year.

Even if Russian cut off gas to Europe, the West could meet its power needs by a variety of means. “If we have to, we can fire up a lot of idle coal-powered plants. It would take time, but only months,” said Professor Alan Riley, from City University.

“The real danger is that we hit Russia too hard and crash the whole Russian economy. Nobody wants to do that,” he said.

Russia’s markets have so far been insouciant, apparently convinced that sanctions are largely hot air unless Europe joins in earnest. They have brushed off the threat of fresh measures by the EU this week, betting that the unwieldy bloc is still too divided to take serious measures even after the airline horror.

The MICEX index of Russian stocks fell just 2.7pc in the first day of trading after Britain, Germany and France vowed to press ahead with tougher action. This was a minor correction, far short of a systemic shock. The state-owned bank VTB actually rose on the day. Yields on 10-year Russian rouble bonds have nudged above 9pc but are not much higher than they were before the crash.

Europe remains starkly divided over calls for “tier 3” measures against key pillars of the Russian economy, with EU officials warning that any such action risks spinning out of control and suffocating Europe’s fragile economic recovery.

While Britain’s David Cameron called for “a new range of hard-hitting economic sanctions”, the body language was very different in southern capitals. Spain’s foreign minister, José Manuel García-Margallo, refused to criticise Mr Putin on Monday, and insisted that the EU should not prejudge the crash investigation.

Mr Cameron said “tier 3” measures must be spread across the key sectors of finance, energy and Russian defence in order to share the pain. If it is restricted to financial sanctions, the City of London will suffer a disproportionate hit since it serves as Russia’s offshore hub for raising debt and issuing equity.

France has so far refused to give up a €1.2bn sale of Mistral warships to Russia. "Frankly, in this country, it would be unthinkable to fulfil an order like the one outstanding that the French have,” said Mr Cameron in the House of Commons.

Germany’s Angela Merkel did not even mention further sanctions in her statement over the weekend, and will clearly resist any serious measures against Russian gas suppliers.

Diplomats say Tuesday’s meeting of EU foreign ministers is likely to be a holding action with token gestures until there is more clarity on the crash. But that is small comfort for Russia.

The US has an arsenal of measures that it can roll out, and intends to do so to punish the Kremlin for redrawing Europe’s borders by force. The sanctions so far target long-term finance beyond 90 days maturity. This is slow suffocation. The International Energy Agency says Russia needs $750bn of fresh investment over the next 20 years – and imported Western technology – just to stop oil and gas output declining.

The measures have frozen almost all Russian companies and banks out of the global capital markets. This matters because they owe most of Russia’s $715bn in foreign currency debt. They cannot roll over $10bn coming due each month.

This is not yet a major problem. Russia’s oil giant Rosneft has $20bn of cash reserves. Yet Moody’s issued a credit warning on the company on Monday, saying it must repay $26bn by December next year, with peak repayment demands over this winter.

The longer the stand-off with the West goes on, the more serious it becomes. Sberbank said the government may have to step in with emergency funding for companies but this would eventually raise questions about the Russian state itself.

The US can at any time tighten the noose. There are reports from Washington that it may soon start to use the nuclear option of money-laundering and terrorist laws to cut off all operational finance for targeted Russian companies, effectively preventing any major bank acting as a counter-party on any transaction.

In extremis, this could paralyse much of Russia’s oil and gas industry, reducing it to cash transactions.

The great question is whether China would come to the rescue with loans and trade conduits in defiance of the Western world, if it is shown beyond doubt that Mr Putin’s proxy forces shot down an Asian airliner. “The Chinese will not cut him any slack,” said Mr Granville.

The Telegraph Investor

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